If you are looking for an extra few hundred dollars to make a
down payment on a new car or are facing some unanticipated
medical bills, if the opportunity is available,
borrowing from family is a great option. Many Americans
select this avenue all the time. In fact, peer-to-peer
lending is an estimated $75 billion/year industry. If you
are deciding about lending to or borrowing from someone
close to you, the most important thing to do prior is think
about the long-term effects it will have your relationship.
It is also very important that you outline the key terms and
principles of the financing in writing. You should
also think about obtaining some professional input in the
event that the loan amount is considerable.
Why are family loans so enticing?
- very likely that you will not be required to back your
loan with security
- interest is either very low, or does not exist
- flexible terms
- person you are borrowing from will likely not request any
sort of plan as to what your agenda is with the money
It is extremely opportune to obtain a family loan. But, if
the situation goes bad, relationships are usually effected
adversely as well. It should not matter if your parents or
sibling are your lender, you should still take care of the
loan just as seriously as if you were borrowing from a bank.
Never put your financial well-being or future in harms way.
A good rule of thumb is to never lend an amount that is
greater than what you can afford to not get back. It is
perfectly fine to tell the person requesting your help 'no'.
Issuing a refusal now will be simpler to deal with than any
potential future payment issues. Learn more about
lending family money.
Specific types of person-to-person loans do have tax
implications. A good idea would be to communicate with your
accountant and determine what your requirements will be for
your specific situation. Usually, neither party will have
any tax implications for a loan amount of $10,000 or less.
However, you may be obligated to charge an interest on loans
that are greater than $10,000. Lenders must declare interest
as a taxable income for any loan that does have interest
associated with it, no matter how low the amount. In the
event that the borrower is utilizing the loan for business,
they can typically subtract the interest when determining
what their profits are.
Develop a written contract
You won't need a formal legal agreement for any loan amount,
but it is important that they key terms for your loan are
established in writing in the form of a
promissory note. For example:
- explanation of what the funds are being using for
- the repayment schedule, including specific dates, interest
and amounts. Use a computer program like Microsoft Excel so
that these terms are easy to read and understand.
- some sort of plan on how to deal with any issues or
problems if the occur
In the event of a dispute, these documents offer protection
for all parties involved from any effort of misrepresenting
the original, agreed upon terms. And for income tax
purposes, if the person borrowing is not able to pay back
their debt, this contract will help the lender write off the
debt as non-business bad debt. If you want a more formal
contract, consider having an attorney write one up for you.
Communicate with an expert
If the amount being borrowed is of a significant amount,
or it is going to be utilized for a perilous business
venture, it would be a smart idea to receive counsel from
your lawyer or accountant. You can visit the forums of
There you can post a question and get a response from a
qualified attorney. It is very likely you will be able to
have an attorney write-up an agreement for you for a small
fee. Or you can even use software like
Family Lawyer 2004 for the purpose of putting together
an agreement for your loan.
10 Reasons Not to Lend to Friends
Helping Without Giving Money/Loans
Paying Taxes On Personal Loan Interest You Receive When
Lending Money to Friends or Family
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